Aug 30, 2022
You probably have heard the word “portfolio” thrown around. While people in different fields use it to mean different things, one common ground is that portfolios act as proof. In academics and careers, a portfolio is documentation (proof) of competence. However, in stocks, a portfolio documents something else entirely. Before delving into the popular types of stock portfolio, let’s grasp what a stock portfolio means.
In finance, a portfolio describes a group of financial assets currently held by an investor. It could include stocks, mutual funds, bonds, cash, ETFs, gold, etc. In stock market terms, a portfolio describes a collection of stocks bought and held by an investor. Generally, the stocks are purchased because they have the potential to increase in value or yield consistent returns (dividends).
You probably have heard the common quote – Don’t put all your eggs in a basket. It is as accurate in the stock market as in other fields of endeavour. Instead of having a different basket, a stock portfolio means you have different ‘eggs’ in one basket. The advantage of this can be seen in risk mitigation. If a stock fails to perform well in a portfolio, the loss is mitigated by the better-performing ones.
As a rule of thumb, while you answer the question of “How many stocks should I have in my portfolio?” you should also take note of the degree of correlation of the stocks therein.
There are five popular portfolios in stocks. Generally, the type of stock portfolio an investor opts for often reveals their level of diversification, personality, risk appetite, and financial goals overall.
It is often believed that the higher the risk, the higher the reward. This is the case of an aggressive portfolio. It consists of high-growth stocks, typically from relatively new and undiscovered companies. Stocks from these companies, usually in the early growth stage, have a unique value proposition.
The asset classes in this category pose an outsized risk with the potential of offering a massive return. In addition, the stocks in this category have a high beta. This means their prices constantly fluctuate in either direction compared to the general market. A typical example is technology stocks. While anyone can build an aggressive stock portfolio, this type of portfolio is either seen with young adults or inexperienced investors. Aggressive portfolios offer over-exposure to the stock market.
As the name implies, a defensive portfolio houses stocks that are conservative. This portfolio includes stocks that do moderately well in any market cycle. The companies behind these stocks are counter-cyclical, meaning they do not follow the general market movements. Typical examples are companies that manufacture or sell everyday necessities or staples. They are low beta stocks and encompass diversification across sectors and countries.
A defensive portfolio is a popular choice for investors with a meagre risk appetite. In addition, because they sometimes offer a dividend, it is a common strategy many investors employ to minimise loss during market downtimes.
The income portfolio is specifically designed to benefit from the regular income paid to the shareholder through dividends or benefits. The income portfolio differs from the defensive portfolio because it focuses more on getting a higher dividend payout ratio. As a result, companies with income stocks are slow growers in the industry.
Investors with this portfolio enjoy stability without having to do a thing. Real Estate Investment Trusts (REITs) are an excellent example of this investment. The income portfolio suits retirees looking for how to make a passive income from the stock market. However, bear in mind that these stocks are subject to changes in the macroeconomy.
As hinted by the name, the hybrid portfolio is an investment mash-up of different types of financial assets. Typically, this portfolio would include a blue-chip company and other assets such as bonds, REITs, etc. The ultimate goal of the portfolio is diversification across several asset classes, which aims to achieve wealth appreciation in the long run. Similarly, the investor can be aggressive, moderate, or conservative.
The speculative portfolio entails the highest risk of all five portfolio types. This type of portfolio aims for a huge capital appreciation by investing in startup stocks in their growth stage. Many of the stocks in the speculative portfolio are included in initial public offerings or promised to be the next Amazon and Tesla.
Investors continue to opt for stocks in this category because owning the right one could make all the difference in their finance. This portfolio type is more suited for investors with a high-risk tolerance. Some people would consider speculative portfolio trading a form of gambling. Before investing, it is advised to spend quality time researching the product and company.
After closely examining the different types of stock portfolio, investors and would-be investors should be able to decide which one suits them better. As mentioned earlier, your portfolio choice also speaks volumes about your investment temperament and risk appetite. Building a portfolio takes time and research with a bit of balance to avoid falling to the extreme. The extra effort devoted is what separates investors from people who merely invest in the index. Before you build your stock portfolio, remember that capital preservation is crucial, and the goal of investing is not to make bogus returns but to continually beat the stock indexes.
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